Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Friday, December 16, 2011

Krugman takes on the Austrians and Ron Paul (and, as usual, misrepresents what they are saying)

Gee, hoodathunkitt? Paul Krugman hates Ron Paul. It is not enough for Dr. Paul to want to leave abortion to state legislatures (where the U.S. Constitution would place it), but the very fact that Dr. Paul is personally opposed to abortion and would not perform one is enough to send Krugman into a rage.

Furthermore, Krugman attacks Dr. Paul on the matter of civil rights. Now, keep in mind that Dr. Paul is not against civil rights per se, given that no other person on the scene, Democrat or Republican, that is running for president that openly opposes the police state that both parties have created. (Sorry, Krugman. One cannot support both civil rights AND a police state. So, who is against civil rights?)

Anyway, Krugman is not referring to Dr. Paul's views on race, but rather Dr. Paul's view of the 1964 Civil Rights Act. Like all Progressives, Krugman holds that any law or regulation that is created in the name of something like civil rights is in itself the very essence of those rights. As Frederic Bastiat wrote in The Law in 1848, socialists (and I should add, Progressives) always couched beliefs within a specific government action:

Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all.

We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain.

Likewise, according to Paul Krugman, the only reason one could oppose sections of the Civil Rights Act which give government huge swaths of control over private property is racism. (Likewise, if one thinks that ANY environmental regulation is bad or unnecessary, then one is in favor of having feces wash up on beaches, to paraphrase Anthony Lewis, who also wrote his columns at the NYT.)

But Krugman was only getting warmed up when he accused Ron Paul of being a racist and a misogynist. (And why else would one be opposed to abortion than out of hatred for women? Gloria Steinem has declared such, and so it is an established truth, at least at Princeton University and the NYT.)

Ron Paul, writes Krugman:

...(ignores) reality, clinging to his ideology even as the facts have demonstrated that ideology’s wrongness. And, even more unfortunately, Paulist ideology now dominates a Republican Party that used to know better.

Given the open opposition that Republican stalwarts have exhibited toward Dr. Paul, the idea that his "ideology" is dominating the GOP is a very sick joke, but Krugman seems to be full of humor these days. Unfortunately, he totally misstates the position that Austrians have on money, and he further writes that all Austrians believe that the monetary base is exactly the same as money that is circulating.

First, as he points out in the article, the Fed massively increased the monetary base and some Austrians have said that sooner or later if that base is turned into large-scale lending, we are going to have inflation. That is a no-brainer. However, because some Austrians have said that maybe inflation will occur sooner rather than later, according to Krugman, that means that all Austrian theory on money is wrong. (This is what the ancients once called a non sequitur, but without the non sequitur, Krugman would not have any columns.

Second, Krugman continues in that insistence:

Austrians, and for that matter many right-leaning economists, were sure about what would happen as a result: There would be devastating inflation. One popular Austrian commentator who has advised Mr. Paul, Peter Schiff, even warned (on Glenn Beck’s TV show) of the possibility of Zimbabwe-style hyperinflation in the near future.

So here we are, three years later. How’s it going? Inflation has fluctuated, but, at the end of the day, consumer prices have risen just 4.5 percent, meaning an average annual inflation rate of only 1.5 percent. Who could have predicted that printing so much money would cause so little inflation? Well, I could. And did. And so did others who understood the Keynesian economics Mr. Paul reviles. But Mr. Paul’s supporters continue to claim, somehow, that he has been right about everything.

Austrians are not shocked at what has transpired. The economy, thanks to the bailouts, explosion of regulations, and incendiary rhetoric from the White House, is mired in depression, just as Austrians predicted it would be if the policies of the past four years were followed. As long as the monetary base remains just that -- a base -- and the money does not circulate, the official rate of inflation will be low. What I do find interesting, however, is Krugman's insistence that commodity prices have nothing to do with inflation, that the only reason they rise and fall is because of demand from "emerging economies" and "volatility." (Of course, "volatility" is an effect, not a cause, but since Keynesians regularly confuse cause and effect, we should not be surprised at Krugman's conclusions.)

You see, if Austrians are wrong in their belief that an expansion of money in circulation will force up prices (and that is what Krugman insinuates), then all of monetary theory is turned upside down. For that matter, Krugman already is on the record in calling for the Fed to directly purchase U.S. Government securities on the primary market, which in essence would be financing government via the printing press. Does Krugman also believe that such an action would not have a huge effect upon prices of goods, or does he want us to believe that any predictions of inflation here would be wrong?

Krugman's insistence that Austrians are ignorant about money is, well, ignorant. Austrians say that money is a secondary good which has a primary use to facilitate exchanges, and its productivity exists in the fact that it allows exchanges to occur that would not happen in a barter economy. Austrians further hold that money is subject to all of the laws of economics, including the Law of Marginal Utility (no, we don't hold that it simply is a quantity variable).

However, one of the most important aspects of Austrian thinking on money is that Austrians emphasize the transmission mechanism of new money being injected into the economy, and that transmission is non-neutral, for those receiving the new money first will be able to pay for goods at the old prices, but with new incomes. This view contrasts with the Keynesian viewpoint that monetary transmission is neutral, and that the only thing which matters is that money get put into the economy so that someone can spend it.

Moreover, Austrians also point out that the injection of new money into the economy also will have an effect upon the relative prices of goods, and that the relations will change as more money pours in. This contrasts with Krugman's view that new money has no such effect, and that everyone benefits equally from monetary injections. (In Krugman's view, while inflation benefits debtors at the expense of creditors, that is OK because he falsely assumes that all creditors are the "one percent" and that all debtors are in the other category.)

So, because hyperinflation has not hit, Austrians are totally ignorant about money, and that includes Ron Paul. We are dealing with timing, not monetary theory, and Krugman by confusing the former and latter, demonstrates his own ignorance about monetary matters.

38 comments:

Rick Teller
said...

Another way to refute Krugman is this: there are two powerful opposing forces in the economy these days. One is the force of monetary expansion, fueled by the Fed's money printing, which, other things being equal, would eventually result in price inflation and perhaps hyperinflation.

The other is downward pressure from the massive amount of debt in the world, for which there is not enough income to support. That debt is a direct consequence of decades of bad government policies including deficit spending, artificially low interest rates, policies such as the deductibility of interest expense and other tax incentives that created the housing and other bubbles, among other things. Inability to service these debts is causing asset sales retrenchment, and economic contraction.

Both these conflicting forces are bad, definitely not what you want to have in a healthy, growing economy. They have temporarily been canceling each other out to some extent, in an uneven way, but we may not be far from the time when one of them will chase the other from the field. No one, Austrian or not, can be sure which of the two will triumph, but the present stalemate isn't a stable equilibrium. Both malign forces are caused by statist intervention in the economy and markets, especially the market for capital.

The fact that we have to root for the forces whose end point is a depression so we can avoid making everyone's money worthless, and simultaneously have to root for the forces whose end point is a runaway inflation in order to keep people employed, is a direct consequence of the statist policies that Krugman advocates.

Look, I am not a Ron Paul fan because of some of his overly, blanket libertarian views (passivism overseas, and a couple other policy issues) but the man is not a racist. Some like to point to his statement that "blacks are disproportionately responsible for violent crimes" as evidence of his so-called racism. The statement is statistically true, however in today's politically correct environment that is considered being a racist. What a shame.

Without Krugman's pettiness, he would have not reason to write at all. His column was motivated by his running feud with Peter Schiff and not much else. Krugman wants to be right while he can be, and with some of the insolvency problems in the banking industry and in the federal budget papered over for the time being (via the can-kicking exercises of his former academic colleague), this is the time to argue that the "liquidity trap" keeps inflation low. As you say, Prof. Anderson, this situation will not hold. We are still in the deflationary spiral predicted by far more thoughtful analysts, such as Carmen Reinhart. The housing market has not bottomed, the federal deficit is out of control (check the November Monthly Treasury Statement), and the banking sector is held together with the continuing fantasies of the FASB mark to unicorn rule. Bernanke did not "stabilize" the financial markets; he has simply deferred their final bust with hallucinated money. But Krugman never cares about long-term consistency. He just likes to say I told you so while he can, and even he knows his time will run out in the coming years, at which point he's confident that everyone will have forgotten, as he takes up the mantle of an "inflationista."

I'm unclear on what you define as a "police state." Is this only something that is set up by the Feds? Here in Arizona, we have quite the local version of a police state run by Joe Arpaio, his illiterate deputies and a variety of xenophobic citizen militias.

Their only goal of course is to instill fear and distrust within the Hispanic community. Is this the kind of freedom you describe when you talk about state's rights?

I'm hardly a fan of Joe Arpaio, so don't try to paint me as one. I also do not like Arizona's law precisely because it creates a police-state atmosphere and because people like Arpaio are bullies with badges and guns.

There is no such thing as "states' rights." Only individuals have rights, but states have delegated powers, and enforcing international borders is not one of them.

What did our society do to stop US citizens from being detained and profiled?...Sheriff Joe will prob get re-elected next year.

Most Ron Paul supporters seem to have no problem chanting freedom and decrying the federal police state, while picking up their AK-47s to go harass Mexicans and burn down mosques. Some freedom...I guess the market is supposed to take care of that somehow though.

Professor Anderson, let me preface by stating I am not defending Sheriff Arpaio’s polices however I would like to clarify a point you made and pose a question.

The 10th Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Thus while I concur only individuals have rights, States do not have “delegated “powers rather they are plenary subject to those specifically allocated the Federal government under the US Constitution and their own State Constitutional restrictions.

Which begs the question; since States have not only a right, but a duty to enforce the law within their State jurisdiction, if the Federal government has abdicated their law enforcement obligations, does not a State (particularly a boarder State) have a duty and responsibility to protect their citizens?

These articles from Hoppe might help you in understanding some libertarian theory regarding immigration. Granted, not all libertarians agree on the issue and I certainly don't agree with everything that Hoppe says, but it should give you a better picture of how libertarians approach the issue of immigration (esp. ancaps).

As for what defines a police state, it's basically a state that uses rigid or excessive control over otherwise lawful actions (natural law) and that has a greater supervisory role (i.e. nosy) in the same. At least that is how I would define it. I am not positive, but I would think that Dr. Anderson would generally agree with that definition.

"First, as he points out in the article, the Fed massively increased the monetary base and some Austrians have said that sooner or later if that base is turned into large-scale lending, we are going to have inflation. "

Not just inflation: there were many Austrians screaming about hyperinflation and predicting a collapse in US Treasuries: both spectacularly wrong predictions.

"This view contrasts with the Keynesian viewpoint that monetary transmission is neutral, and that the only thing which matters is that money get put into the economy so that someone can spend it."

Keynesians are not monolithic: the Cambridge Keynesians who were students and associates of Keynes and Post Keynesians NEVER held that money is neutral. To them, money is always non-neutral.

It is curious that the Hayekian Austrian business cycle theory in its classic 1930s form serious holds the aim of trying to make money neutral: an absurd piece of idiocy.

Do you even know what a libertarian is? The article you sited does not have one word about Ron Paul or libertarians. You'll probably find some libertarians that are members of the tea party but to equate the two is laughable.

"I've never understood why libertarians think the state is the only entity capable of thuggery and intimidation."

And I've never understood why Statists think libertarians think this. What, as I understand, libertarians think is that the State is, by definition, the instrument of coercion and oppression. Unlike human beings who are not aggressors and violators of others' individual rights by their very nature, the State is, by definition and by its very nature, an aggressor and a perpetual violator of the individual rights of the people over whom it lords.

Why is this distinction so difficult for stooges of the State to understand? As Morpheus said, many of these people are so inert, so hopelessly dependent on the system that they would fight (I say die) to defend it.

"Not just inflation: there were many Austrians screaming about hyperinflation and predicting a collapse in US Treasuries: both spectacularly wrong predictions."

You are fallaciously claiming that the end period of when the predictions lose their validity has already passed. There will be a collapse in US Treasuries, because there is no way the government can pay its bills without massive inflation.

Gee, I had no idea that "most Ron Paul supporters" spent all their time burning down mosques, and, sorry, pal, I don't own an AK-47. Are you saying that "most" people who support Ron Paul have taken AK-47s to go shoot Mexicans?

Oh, David Frum, the same David Frum who claimed Iraq had "weapons of mass destruction" and who has called for the invasion of Iran and God knows where else, is your authoritative source. Good luck with that.

As for LK, where did I write that money was neutral? All I said was that Keynesian analysis is based upon a pure quantity theory of money, and that Keynesian analysis says that all that matters is spending and not who spends or where the spending is directed. Krugman says that all the time.

"Unlike human beings who are not aggressors and violators of others' individual rights by their very nature, the State is, by definition and by its very nature, an aggressor and a perpetual violator of the individual rights of the people over whom it lords."

American Patriot is not a libertarian and we all clearly understand that. Concern about radical islam is not high on the libertarian radar and is a main reason AP is not a Ron Paul supporter or libertarian. Your charge that Ron Paul supporters are "picking up their AK-47s to go harass Mexicans and burn down mosques" is simply false and defamatory (what else to expect from non-libertarians and non-Austrians). BTW, antiwar.com is a fantastic site dealing with war and civil liberties issues and is explicitly libertarian and Austrian:

Well, according to people like Don, if one is not on the far left socially, then one is a member of the KKK. There is no middle ground with these folks. One cannot support ANY of the historical doctrines of federalism without being a racist and bigot.

One of the great ironies is that the KKK of the 1920s was essentially Progressive in its outlook. Most Progressives at that time (i.e. Woodrow Wilson) not only were racists and supporters of Jim Crow, but they also believed in Eugenics. Look at the writings of Margaret Sanger, founder of Planned Parenthood, if you wish to see real racism.

For that matter, some of the worst racist politicians, such as "Pitchfork Ben" Tillman, Woodrow Wilson, and Theo Bilbo were squarely in the camp that believed federal intervention and a stronger regulatory state was the best thing for this country.

I agree that the "states rights" crowd in the South during the Civil Rights era gave the original doctrines of federalism a bad name. However, this same doctrine was used by abolitionists in places like Wisconsin pre-Civil War as a reason NOT to obey the Fugitive Slave Law. Moreover, you might recall that during that last Bush administration, some localities openly defied laws like the Patriot Act and draconian immigration laws because people believed they were unjust.

Federalism can be a mixed bag. States used it to impose huge injustices upon African-Americans just as states used the same doctrine earlier in SUPPORT of African-Americans.

Unfortunately, what Don has said is that the ONLY reason one might object to near-complete federal rule is racism. That is nonsense. Centralization is by far the best tool that governments can use for tyranny, and history proves it. That is the reason that Thomas Jefferson opposed a strong central government.

Interestingly, the Progressives used the strong central government view to push racism, not to blunt it. So, despite the fact that Woodrow Wilson was the most vehement racist ever to occupy the White House, Don believes that if we oppose what Wilson did (creating the Federal Reserve, etc.), then we oppose him ONLY because we are vicious racists.

That is the supreme irony, but that is how people like Don argue. They want it both ways, and when we point out that Wilson was a horrible racist (just like others of his ilk), he screams RACISM even louder, as well as, "I CAN'T HEAR YOU!!!"

I have no middle ground? You are the one who admits that states' rights have been a mixed bag for minorities...yet your ideology leads you to oppose the Civil Rights Act.

The fact that Southern progressives were raging racists only strengthens my point that oversight of abuse and intimidation of minorities should not be left in the hands of local authorities.

What's the libertarian solution Anderson? The only solution you have is just to give more examples of what the Feds have done wrong. Do peoples' better angels magically appear in the absnece of the heavy hand?

don - i dont understand how a person can, in one hand, admit that it is wrong for a person or group to even attempt to take rights away, but can just turn a blind eye when the government actually does it. why do they get a free pass?

According to Don, if one even questions one jot or tittle of the 1964 Civil Rights Act, then one is a raging racist. I do have problems with the act, even though I don't have problems with some of the intents. For example, Hubert Humphrey said that if there were "quotas" in the 1964 act, then he would eat each piece of paper on which it was written.

Within a short time, the courts and the EEOC interpreted that same act as requiring racial quotas, and I believe that quotas in the end are self-defeating.

What Don is saying is that if one opposes any portion of the Civil Rights Act of 1964, then one opposes ALL civil rights. That is not the truth, but Progressives famously created their own truths.

The act ultimately led to the present situation of federal bureaucrats sniffing around every organization and declaring it to be full of racism, and I can give you chapter and verse on that.

As for the "better angels," are you saying that the Civil Rights Act only loosened the "better angels" and kept the bad guys in check?

The irony is that I believe the Civil Rights Act did play a positive role in awakening people to the worst aspects of racism in this country, yet I also can see where it provided the federal government with the very tools of tyranny.

By the way, Don, northern Progressives also were racists. Read the works of John Dewey and John R. Commons and others who were in the North. I'm working on a paper in that area and have found lots and lots of incendiary quotes about African-Americans from these "progressive" northerners.

No human being has had a greater impact on American public education than John Dewey, yet he viewed blacks as being inferior at best. The racism went across the board and many of your Progressive heroes were full of the stuff.

Regarding “states rights”, I would suggest that that Ron Paul look into Clarence Thomas’ theory that the 14th amendment requires that the states respect fundamental rights of citizens as a result of the Privileges or Immunities Clause which he insists is substantive and not procedural. Such an interpretation would have precluded all Jim Crow type legislation.

It is my position that the left (and basically all of our opponents) are congenitally unable to differentiate crony capitalism and other evil government acts from libertarian NAP free market activities. They start with a bogus and mindless “theory”, USA = racism = capitalism (think of Michael Moore), then proceed to blame all examples of state racism upon “capitalism”. It’s very similar to their “thought process” (such as it is) when creating their bogus economic narratives (USA/Fed/crony capitalism/military Keynesian = The Free Market). It then becomes easy for them to blame “The Free Market” for the boom bust cycle, war and jobless recoveries when employing their simpleton historical anecdotal methods (think “Lord Keynes“).

Both narratives allow for them to imagine problems that do not and would not exist in the free market. The problem for blacks historically in the USA was not racism in the market but vicious state action. Blacks and poor people generally around the world desperately need the protections provided by private property, freedom of contract and sound money. It is “progressive” “thought” imposed around the world that keeps them from having these benefits and is thus the cause of most violence and grinding poverty in the third world. Further, just think about how the left (and probably the CIA too) would howl if an African country attempted to go libertarian. The only conclusion one can have from this is that the leftists hate poor people.

There is no assumption. Every bit of it is a logical deduction from the fundamental definition of the concept involved. To understand this, try defining the nature of man and of the State and see where initiation of force against others fits in. You will find that it is possible to define man without the need to include initiation of force against others while you will find it impossible to provide a coherent definition for the concept "The State" without including the attribute that it necessarily engages in the initiation of force against those it 'governs'.

My statement is not borne out of observation but derived by reasoning. Try reasoning it out rather than making assertions that it is an assumption.

And talking of the KKK, is it the nature of man to be a member of the KKK? See how badly you have missed my point?

Stereotyping, racism, and violence are an innate part of human nature.

Right. And as I have said many times, those are the true problems facing mankind, not a "lack of aggregate demand". Further, we have private property to enable our protection from volence from all sources. Keynesian and other interventionist policies REQUIRE the evisceration of private property by their very terms and thus eviscerate the protections provided by private property.

"Progressives" claim that the free market is racist. Otherwise, why would they demand legal punishment for refusal to engage in contractual relations with members of various ethnicities? As you demand?

"Stereotyping, racism, and violence are an innate part of human nature. Check the psychology literature if you don't believe me...."

False. If that were the case, all men should be engaging in stereotyping, racism and violence ALL THE TIME. If something is a part of your nature, you do not have the option of switching it on and off when you feel like. Humans, however, always have the option of NOT engaging in stereotyping, racism and violence. Thus, it is absurd to say that these are a part of human nature.

It is a different pont to say that man is CAPABLE of engaging or that man often TENDS TO engage in these behaviours, but that does not make it a part of its nature. By doing so, you would be contradicting the very meaning of the concept "the nature of a thing".

So, your attempt to show that humans are by nature violent and hence seek legitimacy for The State which is violent by nature comes across as a very poor defense of an indefensible entity.

It was hopeless from the moment he asserted "burning down mosques" and then when asked to give evidence, he pointed to people peacefully exercising their free speech rights, over that have not even been built yet.

I'm sure Don would love to take away people's right to peacefully protest... I'm curious about how he would achieve that? More police, riot tanks, tear gas, electric shock?

By the way, with regards to Islam, I have no problem with people going to mosques, praying, abstaining from alcohol (generally smoking copiously). I have no problems with the wailing prayers, nor with the food, nor even with the head scarves or the full body covering for the devout.

I have one problem with Islam... and that is the rule that no Muslim can ever decide not to be a Muslim any longer. To do so is a death sentence under Sharia Law. People need the right to make decisions about their own lives, and some people will change their minds once they have thought about the issues. Every philosophy (both religious and secular) competes for believers and the competition should be fair and open competition. To attempt to block someone from opening themselves up to new possibilities using threat of death is violence in its most ugly form. The violence that forces a closed mind unto otherwise potentially open minded people. This is the violence that is the seed of all other violence.

which measure inflation in the cost of goods producers use at different stages of the production cycle from raw materials to intermediate goods to finished goods. I grabbed this data back in October, its gone down slightly since then but it was higher before that and the issue is that inflation has occured the last couple of years despite Krugman's claims. Due to the slow economy producers are reluctant to pass on price increases to the next stage of production so inflation at each stage is lowered, but that leaves less funds available for producers to expand and hire people:

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).